Chicago Divorce Lawyer Russell D. Knight Details How Upside-Down Mortgages Are Handled in Illinois Divorce Property Division

CHICAGO, IL - Mortgages with outstanding balances exceeding home values create unique challenges in Illinois divorce property division, requiring creative solutions when houses cannot be sold for amounts covering the debt. Chicago divorce lawyer Russell D. Knight of the Law Office of Russell D. Knight (https://rdklegal.com/illinois-divorce-with-an-upside-down-mortgage/) is outlining how parties can handle negative equity through one spouse keeping the house with indemnification agreements, short sales, or deeds in lieu of foreclosure.

According to Chicago divorce lawyer Russell D. Knight, when a marital property's mortgage is upside down, the parties do not divide any value in the home because there is no net equity. Instead, the house has a negative value that must be dealt with during the sale or accounted for if one party keeps the house and the greater debt.

Chicago divorce lawyer Russell D. Knight has practiced family law since 2006 and has extensive experience guiding clients through mortgage issues during divorce. He has written more than 750 articles on Illinois divorce and family law, serves as a published author with the Illinois State Bar Association, and has been quoted by NBC News, Newsweek, Inc. Magazine, and Parents Magazine. He has also completed advanced trial and deposition training through NITA and the National Family Law Trial Institute.

"From 2008 to 2014, virtually all houses were worth less than the mortgages against them," Knight explains. "We developed effective strategies during that period for dealing with upside-down mortgages, and those same approaches work today when parties face negative equity situations."

Illinois divorce courts divide marital property without regard to marital misconduct in just proportions under 750 ILCS 503(d). Marital property includes all property, including debts and other obligations, acquired by either spouse subsequent to the marriage under 750 ILCS 503(a). This means negative equity in a home is marital property subject to division, even though it represents a liability rather than an asset.

When one party keeps the house and remains responsible for the mortgage, the monthly payment may still be a manageable expense despite the negative equity. In this situation, one party can keep the house and be responsible for mortgage payments, though the mortgage will remain in both parties' names because no lender will allow refinancing of a mortgage exceeding the property's value.

"The party keeping the house should indemnify the other party for debts associated with the assets they are keeping," Attorney Knight notes. "Indemnification means compensating for loss or damage sustained, and every marital settlement agreement should include language holding the other party harmless for allocated debts."

If the party keeping the house fails to pay the mortgage still under both parties' names, the other party can file a contempt petition in divorce court. However, the party not keep the house cannot have their credit tied up indefinitely in a house where they do not live. The party keeping the house should agree to continuous good faith attempts to refinance the mortgage and remove the other party's obligation.

Knight typically recommends requiring three good-faith refinance attempts per year with a maximum of three years to refinance, and contracting that failure to refinance per the agreement results in immediate sale of the house by a real estate agent chosen by the party who did not keep the house, with all proceeds split equally and all liabilities after the sale borne by the party who kept the house.

When neither party elects to keep the house and its debts, the house must be sold. In theory, the divorcing couple should pay the extra money owed against the mortgage after sale, but in practice, mortgage companies typically offer short sales where lenders agree to forgive the balance between the sale price and the outstanding mortgage. It is almost always in mortgage lenders' best interests to cooperate with short sales rather than go through costly foreclosure processes.

Even if neither party wants the house or the trouble of selling it, parties can approach mortgage lenders and request deeds in lieu of foreclosure, where borrowers convey fee-simple title to lenders in satisfaction of mortgage debt as a substitute for foreclosure. Again, it is almost always in mortgage lenders' best interests to accept conveyances and avoid foreclosure expenses.

The critical point about indemnifying ex-spouses while taking over mortgages, doing short sales, or executing deeds in lieu of foreclosure is that these arrangements must be agreed upon. Courts have no authority to force parties to enter into agreements with each other or lenders. If there is no agreement, courts will let parties flounder into foreclosure or force sales even if debts remain owed.

"Courts seek high degrees of finality in property distribution so parties can plan their futures with certainty and are not encouraged to return repeatedly to the courts," Knight emphasizes. "Sitting in the house while not paying the mortgage and letting it go into foreclosure is the worst option, as banks will demand the house be turned over and both parties be responsible for remaining debt."

Banks can even intervene in divorces to ensure they are paid from whatever other assets the parties have. Illinois allows timely intervention as of right when statutes confer unconditional rights to intervene, when representation of the applicant's interest by existing parties may be inadequate, or when applicants are situated to be adversely affected by property disposition under court control under 735 ILCS 5/2-408(a).

Illinois divorce courts are liberal about adding necessary and proper parties for exercising their authority under the Illinois Marriage and Dissolution of Marriage Act under 750 ILCS 5/403(d). Including intervening parties is often the only way to resolve outstanding and unknown obligations of divorcing parties and achieve the finality courts seek in property division.

About Law Office of Russell D. Knight:

The Law Office of Russell D. Knight is a Chicago-based law firm dedicated to Illinois family law, including divorce and property division. Led by attorney Russell D. Knight, the firm represents clients throughout Chicago and Illinois. For consultations, call the office.

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Website: https://rdklegal.com/

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